A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is basically designed for small businesses and the self-employed. Under a SIMPLE IRA plan, your employer is able to offer you tax-deferred benefits similar to a 401(k) plan without suffering high administrative costs.
Employers are eligible if they have fewer than 100 employees that earn over $5,000 and offer no other retirement benefit plan. Employer contributions are tax deductible, and employers have no filing requirements.
Your employer may set up a SIMPLE IRA as either a matching contribution plan or a non-elective plan.
- Non-Elective – Your employer pays a flat amount equal to 2% of your salary into your SIMPLE IRA. You have the choice of adding to this amount by directing some portion of your pre-tax salary into the IRA account. The employer portion is deposited regardless of whether you make any contributions.
- Matching – You decide how much to contribute to your SIMPLE IRA and your employer matches your pre-tax contribution up to a limit of 3% of your total salary (not less than 1%). If you do not contribute to the matching plan, your employer is not obligated to contribute either.
The employee contribution portion cannot exceed $12,000 (rising to $12,500 in 2015). If the plan allows, participants over the age of 50 can make catch-up contributions of an extra $2,500 ($3,000 in 2015). If you have other IRAs and plans you contribute to as well, the total of all contributions may not exceed $17,500 ($18,000 in 2015).
These limits go far beyond the traditional or Roth IRA contribution limits, making SIMPLE IRAs attractive to employees as well as employers. You are always 100% vested in SIMPLE IRAs – in other words, you have complete ownership of all the funds in your account. You also direct the investments, within certain limitations.
SIMPLE IRAs are still IRAs, and thus are subject to the same rules as other IRAs – mostly. This is where SIMPLE IRAs can become a little less simple.
- Distributions – As with other IRAs, you must take required minimum distributions by age 70-1/2 or face a 50% penalty on the excess accumulation, and you will face a 10% early withdrawal penalty on distributions taken before age 59-1/2. These penalties are in addition to the regular taxes you will pay upon withdrawal.
SIMPLE IRAs have an added limitation known as the two-year rule. The 10% penalty for early distribution is increased to 25% within the first two years after the first employer contribution is made (except for a few medical or disability-related circumstances).
- Transfers and Rollovers – The two-year rule also prohibits transfer or rollover of the SIMPLE funds to a different type of retirement plan within the first two years. Rollover to another SIMPLE plan is permissible during that time.
If you leave your job during the two-year period, your options are to leave it where it is until the two-year period passes, roll it into another SIMPLE IRA if that is available to you, or withdraw it and take the tax penalties. After the two-year period, you can execute the same types of transfers and rollovers as you can with any traditional IRA.
- Loan Prohibitions – You cannot use SIMPLE funds for loan collateral as you can with 401(k) programs.
Check out IRS Publication 590, Individual Retirement Arrangements (IRAs), for more information on participating in SIMPLE IRAs, or Publication 560, Retirement Plans for Small Business, for information on starting one.
Whether or not you think it is as simple as the acronym implies, a SIMPLE IRA is certainly an effective way of saving for retirement.